UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 000-20900
COMPUWARE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2007430
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
ONE CAMPUS MARTIUS, DETROIT, MI 48226-5099
(Address of principal executive offices including zip code)
Registrant's telephone number including area code: (313) 227-7300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date:
As of October 31, 2006, there were outstanding 352,235,582 shares of Common
Stock, par value $.01, of the registrant.
Page 1 of 35 pages
38
PART I. FINANCIAL INFORMATION Page
--------------------- ----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2006 and March 31, 2006 3
Condensed Consolidated Statements of Operations
for the three and six months ended September 30, 2006
and 2005 4
Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 2006 and 2005 5
Notes to Condensed Consolidated Financial
Statements 6
Report of Independent Registered Public Accounting Firm 19
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
-----------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 6. Exhibits 34
SIGNATURES 35
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2
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, MARCH 31,
ASSETS 2006 2006
-------------- --------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 470,095 $ 612,062
Investments 242,030 265,131
Accounts receivable, net 381,262 418,745
Deferred tax asset, net 30,744 32,015
Income taxes refundable, net 81,509 77,956
Prepaid expenses and other current assets 41,437 24,455
Building - held for sale 14,816
-------------- --------------
Total current assets 1,247,077 1,445,180
-------------- --------------
INVESTMENTS 49,446 32,149
-------------- --------------
PROPERTY AND EQUIPMENT, LESS
ACCUMULATED
DEPRECIATION AND AMORTIZATION 391,239 395,653
-------------- --------------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 65,450 61,918
-------------- --------------
OTHER:
Accounts receivable 195,039 206,964
Deferred tax asset, net 16,051 13,983
Goodwill 334,639 320,082
Other 35,314 35,039
-------------- --------------
Total other assets 581,043 576,068
-------------- --------------
TOTAL ASSETS $ 2,334,255 $ 2,510,968
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 23,040 $ 24,468
Accrued expenses 145,018 170,590
Deferred revenue 365,069 350,349
-------------- --------------
Total current liabilities 533,127 545,407
DEFERRED REVENUE 297,298 343,246
ACCRUED EXPENSES 13,200 17,244
DEFERRED TAX LIABILITY, NET 32,750 25,572
-------------- --------------
Total liabilities 876,375 931,469
-------------- --------------
SHAREHOLDERS' EQUITY:
Common stock 3,522 3,779
Additional paid-in capital 720,946 763,420
Retained earnings 723,610 805,781
Accumulated other comprehensive income 9,802 6,519
-------------- --------------
Total shareholders' equity 1,457,880 1,579,499
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,334,255 $ 2,510,968
============== ==============
See notes to condensed consolidated financial statements.
3
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2006 2005 2006 2005
-------------- ------------- -------------- -------------
REVENUES:
Software license fees $ 56,709 $ 63,589 $ 124,174 $ 131,611
Maintenance fees 115,132 110,901 225,449 218,275
Professional services fees 116,666 118,156 235,202 240,088
-------------- ------------- -------------- -------------
Total revenues 288,507 292,646 584,825 589,974
-------------- ------------- -------------- -------------
OPERATING EXPENSES:
Cost of software license fees 7,010 5,552 13,595 11,239
Cost of professional services 103,645 104,944 211,260 211,189
Technology development and support 39,539 34,400 76,779 70,053
Sales and marketing 67,711 68,198 133,479 140,235
Administrative and general 45,156 51,299 91,384 99,528
-------------- ------------- -------------- -------------
Total operating expenses 263,061 264,393 526,497 532,244
-------------- ------------- -------------- -------------
INCOME FROM OPERATIONS 25,446 28,253 58,328 57,730
OTHER INCOME, NET 10,613 7,852 21,494 14,585
-------------- ------------- -------------- -------------
INCOME BEFORE INCOME TAXES 36,059 36,105 79,822 72,315
INCOME TAX PROVISION 11,250 11,915 25,692 23,502
-------------- ------------- -------------- -------------
NET INCOME $ 24,809 $ 24,190 $ 54,130 $ 48,813
============== ============= ============== =============
Basic earnings per share $ 0.07 $ 0.06 $ 0.15 $ 0.13
============== ============= ============== =============
Diluted earnings per share $ 0.07 $ 0.06 $ 0.15 $ 0.13
============== ============= ============== =============
See notes to condensed consolidated financial statements.
4
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2006 2005
-------------- --------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 54,130 $ 48,813
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization 26,900 25,394
Acquisition tax benefits 2,585 3,502
Stock option compensation 4,862
Deferred income taxes 6,405 11,033
Other (329) 8,910
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable 64,142 70,402
Prepaid expenses and other current assets (4,315) (1,592)
Other assets (99) (506)
Accounts payable and accrued expenses (33,107) (33,706)
Deferred revenue (44,772) (33,160)
Income taxes (3,982) (10,809)
-------------- --------------
Net cash provided by operating activities 72,420 88,281
-------------- --------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses, net of cash acquired (20,484) (30,917)
Property and equipment (10,485) (6,321)
Capitalized software (9,475) (10,732)
Proceeds from sale of property 3,298
Investments:
Proceeds 272,305 209,798
Purchases (266,248) (173,676)
-------------- --------------
Net cash used in investing activities (31,089) (11,848)
-------------- --------------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 1,218 8,678
Contribution to stock purchase plans 2,577 4,447
Repurchase of common stock (190,104) (31,354)
-------------- --------------
Net cash used in financing activities (186,309) (18,229)
-------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3,011 (4,988)
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (141,967) 53,216
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 612,062 497,687
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 470,095 $ 550,903
============== ==============
See notes to condensed consolidated financial statements.
5
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Compuware Corporation and its wholly owned subsidiaries
(collectively, the "Company"). All intercompany balances and transactions have
been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and notes required by GAAP for complete
financial statements. Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, contingencies and results of operations. While management
has based their assumptions and estimates on the facts and circumstances
existing at September 30, 2006, final amounts may differ from these estimates.
In the opinion of management of the Company, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, that are necessary for a fair presentation
of the results for the interim periods presented. These financial statements
should be read in conjunction with the Company's audited consolidated financial
statements and notes thereto for the year ended March 31, 2006 included in the
Company's Annual Report to Shareholders on Form 10-K filed with the Securities
and Exchange Commission ("SEC"). The condensed consolidated balance sheet at
March 31, 2006 has been derived from the audited financial statements at that
date but does not include all information and footnotes required by GAAP for
complete financial statements. The results of operations for interim periods are
not necessarily indicative of actual results achieved for full fiscal years.
Revenue Recognition - The Company earns revenue from licensing software
products, providing maintenance and support for those products and rendering
professional services. The Company's revenue recognition policies are consistent
with GAAP including Statements of Position 97-2 "Software Revenue Recognition"
and 98-9 "Modification of SOP 97-2, 'Software Revenue Recognition,' With Respect
to Certain Transactions", Securities and Exchange Commission Staff Accounting
Bulletin 104 and Emerging Issues Task Force Issue 00-21 "Revenue Arrangements
with Multiple Deliverables". Accordingly, the Company recognizes revenue when
all of the following criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the fee is fixed
or determinable, and collectibility is reasonably assured.
Software license fees -- The Company's software license agreements provide its
customers with a right to use its software perpetually (perpetual licenses) or
during a defined term (term licenses). Perpetual license fee revenue is
recognized using the residual method, under which the fair value, based on
vendor specific objective evidence ("VSOE") of all undelivered elements of the
agreement (e.g., maintenance and professional services) is deferred. VSOE is
based on rates charged for maintenance and professional services when sold
separately. The remaining portion of the fee, net of discretionary discounts
(the residual), is recognized as license fee revenue upon delivery of the
products, provided that no significant obligations remain and collection of the
related receivable is deemed probable. For term licenses and for agreements in
which the fair value of the undelivered elements cannot be determined using
VSOE, the Company recognizes the license fee revenue on a ratable basis over the
term of the license agreement or when all elements have been delivered,
depending on the nature of the undelivered elements.
6
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
The Company offers flexibility to customers purchasing licenses for its products
and related maintenance. Terms of these transactions range from standard
perpetual license sales that include one year of maintenance to large multi-year
(generally two to five years), multi-product contracts. The Company allows
deferred payment terms on multi-year contracts, with installments collectible
over the term of the contract. Based on the Company's successful collection
history for deferred payments, the license fee portion of the receivable is
discounted to its net present value and recognized as discussed above. The
discount is recognized as interest income over the term of the receivable.
Maintenance fees - The Company's maintenance agreements provide for technical
support and advice, including problem resolution services and assistance in
product installation, error corrections and any product enhancements released
during the maintenance period. Maintenance is included with all license
agreements for up to one year. Maintenance is renewable thereafter for an annual
fee. Maintenance fees are deferred and recognized as revenue on a ratable basis
over the maintenance period.
Professional services fees -- Professional services fees are generally based on
hourly or daily rates; therefore, revenues from professional services are
recognized in the period the services are performed, provided that collection of
the related receivable is deemed probable. However, for development services
rendered under fixed-price contracts, revenue is recognized using the percentage
of completion method. Certain professional services contracts include a project
and on-going operations for the project. Revenue associated with these contracts
is recognized over the service period as the customer derives value from the
services, consistent with the proportional performance method.
Capitalized Software -- Capitalized software includes the costs of purchased and
internally developed software products and is stated at the lower of unamortized
cost or net realizable value in accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased, or Otherwise Marketed". Capitalization of internally developed
software products begins when technological feasibility of the product is
established. Technology development and support includes primarily the costs of
programming personnel associated with product development and support net of
amounts capitalized.
The amortization for both internally developed and purchased software products
is computed on a product-by-product basis. The annual amortization is the
greater of the amount computed using (a) the ratio of current gross revenues
compared with the total of current and anticipated future revenues for that
product or (b) the straight-line method over the remaining estimated economic
life of the product, including the period being reported on. Amortization begins
when the product is available for general release to customers. The amortization
period for capitalized software is generally five years.
7
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
Goodwill and Other Intangibles - Goodwill that is allocated to each operating
segment and those intangible assets with indefinite lives are tested for
impairment annually and/or when events or circumstances indicate that their fair
value may have been reduced below carrying value. The Company evaluated its
goodwill as of March 31, 2006 and determined there was no impairment.
Income Taxes - The Company accounts for income taxes using the asset and
liability approach. Deferred income taxes are provided for the differences
between the tax bases of assets or liabilities and their reported amounts in the
financial statements.
Stock-Based Compensation -- Effective April 1, 2006, the Company adopted the
fair value recognition provisions of Statement of Financial Accounting Standards
No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)") using the modified
prospective transition method and therefore has not restated results for prior
periods. Under this transition method, stock-based compensation expense for the
first six months of fiscal 2007 includes compensation expense for all
stock-based compensation awards ("awards") granted prior to, but not yet vested
as of April 1, 2006, based on the grant date fair value estimated in accordance
with the original provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Stock-based compensation expense for all awards
granted after April 1, 2006 is based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123(R). The Company recognizes these
compensation costs net of an estimated forfeiture rate on a straight-line basis
over the requisite service period of the award, which is generally the vesting
term of five years. In March 2005, the Securities and Exchange Commission (the
"SEC") issued Staff Accounting Bulletin No. 107 ("SAB 107") regarding the SEC's
interpretation of SFAS 123(R) and the valuation of share-based payments for
public companies. The Company has applied the provisions of SAB 107 in its
adoption of SFAS 123(R). See Note 5 to the condensed consolidated financial
statements for a further discussion on stock-based compensation including the
impact on net income during the period.
Prior to the adoption of SFAS No. 123(R), the Company measured compensation
expense for its stock-based compensation plans using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"). Awards were granted at current market
prices at the date of grant. Therefore, no compensation cost was recognized for
the Company's fixed stock option plans or its stock purchase plans. The Company
applied the disclosure provisions of SFAS No. 123, as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure", as if
the fair-value-based method had been applied in measuring compensation expense.
Recently Issued Accounting Pronouncements -- In July 2006, the Financial
Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109",
which clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that the Company recognize in its financial statements,
the impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. This
Interpretation is effective for fiscal years beginning after December 15, 2006,
with the cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. Management is currently considering the
impact this Interpretation will have on the Company's financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 "Fair Value Measurements" ("SFAS 157"), which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 applies whenever other standards require (or permit)
8
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
assets or liabilities to be measured at fair value, and therefore, does not
expand the use of fair value in any new circumstances. This Interpretation is
effective for fiscal years beginning after November 15, 2007. Management is
currently considering the impact this Interpretation will have on the Company's
financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 ("SAB 108"), codified as SAB Topic 1.N, "Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements." SAB 108 describes the approach that should
be used to quantify the materiality of a misstatement and provides guidance for
correcting prior year errors. The Company early adopted SAB 108 in the second
quarter of 2007 and accordingly, follows SAB 108 requirements when quantifying
financial statement misstatements. The adoption of SAB 108 did not result in
corrections of the Company's financial statements.
NOTE 2 - ACQUISITION
In April 2006, the Company acquired SteelTrace Limited, a privately held
provider of requirements management products that align application delivery to
business needs through a structured, visual approach to the management of
enterprise application requirements, for approximately $20.7 million in cash.
The acquisition has been accounted for using the purchase method in accordance
with SFAS No. 141, "Business Combinations" and, accordingly, the assets and
liabilities acquired have been recorded at preliminary fair value as of the
acquisition date. The purchase price exceeded the fair value of the acquired
assets and liabilities by $14.2 million and was recorded to goodwill. Intangible
assets subject to amortization totaled $6.5 million of which $4.7 million and
$1.5 million related to purchased software and customer relationships with a
useful life of five and three years, respectively. The remaining intangible
assets subject to amortization have a useful life of one year.
9
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
NOTE 3 - COMPUTATION OF EARNINGS PER COMMON SHARE
Earnings per common share data were computed as follows (in thousands, except
for per share data):
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- --------------------------
2006 2005 2006 2005
------------ ----------- ------------ -----------
BASIC EARNINGS PER SHARE:
Numerator: Net income $ 24,809 $ 24,190 $ 54,130 $ 48,813
------------ ----------- ------------ -----------
Denominator:
Weighted-average common shares outstanding 363,834 387,327 370,261 387,775
------------ ----------- ------------ -----------
Basic earnings per share $ 0.07 $ 0.06 $ 0.15 $ 0.13
============ =========== ============ ===========
DILUTED EARNINGS PER SHARE:
Numerator: Net income $ 24,809 $ 24,190 $ 54,130 $ 48,813
------------ ----------- ------------ -----------
Denominator:
Weighted-average common shares outstanding 363,834 387,327 370,261 387,775
Dilutive effect of stock options 713 3,837 704 2,183
------------ ----------- ------------ -----------
Total shares 364,547 391,164 370,965 389,958
------------ ----------- ------------ -----------
Diluted earnings per share $ 0.07 $ 0.06 $ 0.15 $ 0.13
============ =========== ============ ===========
During the three and six months ended September 30, 2006, stock options to
purchase a total of approximately 51,221,000 and 51,332,000 shares,
respectively, were excluded from the diluted earnings per share calculation
because they were anti-dilutive. During the three and six months ended September
30, 2005, stock options and a warrant to purchase a total of approximately
40,095,000 and 49,091,000 shares, respectively, were excluded from the diluted
earnings per share calculation because they were anti-dilutive.
NOTE 4 - COMPREHENSIVE INCOME
Other comprehensive income includes unrealized gains and losses on marketable
securities and foreign currency translation gains and losses that have been
excluded from net income and reflected in equity. Total comprehensive income is
summarized as follows (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------------- -------------------------------
2006 2005 2006 2005
-------------- -------------- -------------- --------------
Net income $ 24,809 $ 24,190 $ 54,130 $ 48,813
Unrealized gain (loss) on marketable
securities, net of tax 13 (227) 71 (227)
Foreign currency translation
adjustment, net of tax (819) 746 3,212 (1,470)
-------------- -------------- -------------- --------------
Total comprehensive income $ 24,003 $ 24,709 $ 57,413 $ 47,116
============== ============== ============== ==============
10
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
NOTE 5 -- STOCK BENEFIT PLANS AND STOCK-BASED COMPENSATION
Employee Stock Purchase Plan - During fiscal 2002, the shareholders approved
international and domestic employee stock purchase plans under which the Company
was authorized to issue up to 15 million shares of common stock to eligible
employees. Effective April 1, 2005, the offering periods were based on a three
month period. Under the terms of the plan, employees can elect to have up to ten
percent of their compensation withheld to purchase Company stock at the close of
the offering period. The value of the stock purchased in any calendar year
cannot exceed $25,000 per employee. Effective April 1, 2006, the purchase price
is 95% of the last day's average high and low price for each offering period
consistent with the non-compensatory requirements of SFAS 123(R).
Employee Stock Option Plans - The Company adopted five employee stock option
plans dating back to 1991. These plans provide for grants of options to purchase
up to 91,000,000 shares of the Company's common stock to employees and directors
of the Company. Under the terms of the plans, the Company may grant nonqualified
options at the fair market value of the stock on the date of grant. Fifty
percent of the option shares granted under these plans become exercisable on the
third year anniversary of the date of grant, and 25 percent of the option shares
vest on each of the fourth year and fifth year anniversaries of the date of
grant. All options were granted at fair market value and expire ten years from
the date of grant.
In March 2001, the Company adopted the 2001 Broad Based Stock Option Plan. The
plan was approved by the Board of Directors, but was not submitted to the
shareholders for approval, as shareholder approval was not required at the time.
The plan provides for grants of options to purchase up to 50,000,000 shares of
the Company's common stock to employees or directors of the Company. Under the
terms of the plan, the Company may grant nonqualified stock options at the fair
market value of the stock on the date of grant. Option shares granted under the
Broad Based Stock Option Plan either vest every six months over a four year
period or fifty percent of the option shares become exercisable on the third
year anniversary of the date of grant, and 25 percent of the option shares vest
on each of the fourth year and fifth year anniversaries of the date of grant.
All options were granted at fair market value and expire ten years from the date
of grant.
Non-Employee Director Stock Option Plan - In July 1992, the Company adopted the
Stock Option Plan for Non-Employee Directors. Under this plan, 2,400,000 shares
of common stock are reserved for issuance to non-employee directors of the
Company who have not been employees of the Company, any subsidiary of the
Company or any entity which controls more than 10% of the total combined voting
power of the Company's capital stock for at least one year prior to becoming a
director.
During fiscal 1999, the Company implemented a Replacement Stock Option Award
program. The program allows selected participants to pay the option exercise
price with shares of currently owned Company stock. The Company grants a new
stock option award to replace the shares exchanged in the transaction.
11
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
The following is a summary of the status of fixed stock option grants under
Compuware's stock-based compensation plans as of September 30, 2006 and changes
during the six months ended September 30, 2006 (intrinsic values and shares in
thousands):
Six Months Ended
September 30, 2006
------------------------------------------------------------
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Options Price Term Value (1)
----------- -------------- ------------ -----------
Options outstanding as of April 1, 2006 55,710 $ 11.66
Granted 2,116 7.37
Exercised (238) 4.50 $ 722
Forfeited (533) 6.61
Cancelled/expired (1,979) 10.97
----------- --------------
Options outstanding as of September 30, 2006 55,076 $ 11.60
=========== ==============
Options vested and expected to vest, net of
estimated forfeitures, as of September 30, 2006 53,437 $ 11.73 3.66 $ 8,914
Options exercisable as of September 30, 2006 46,376 $ 12.43 2.99 $ 3,954
(1) For options exercised during the six months ended September 30, 2006,
the aggregate intrinsic value represents the difference between the
Company's closing stock price on the date the option was exercised and
the exercise price, multiplied by the number of options exercised. For
options vested and expected to vest, net of estimated forfeitures and
options exercisable as of September 30, 2006, the aggregate intrinsic
value represents the difference between the Company's closing stock
price on the last trading day of the second quarter of fiscal 2007 and
the exercise price, multiplied by the number of in-the-money options
that would have been received by the option holders had the vested
options been exercised on September 30, 2006. This amount changes based
upon changes in the fair market value of the Company's stock.
SFAS No. 123(R) requires the use of a valuation model to calculate the fair
value of stock option awards. The Company has elected to use the Black-Scholes
option pricing model, which incorporates various assumptions including
volatility, expected term, and risk free interest rates. The volatility is based
on historical volatility of the Company's common stock over the most recent
period commensurate with the estimated expected term of the stock option
granted. The Company uses historical volatility because management believes such
volatility is representative of prospective trends. The expected term of an
award is based on the "short-cut" method as described in SAB 107. The risk-free
interest rate assumption is based upon observed interest rates appropriate for
the expected term of our awards. The dividend yield assumption is based on the
Company's history and expectation regarding dividend payouts.
As of September 30, 2006, $20.2 million of total unrecognized compensation cost,
net of estimated forfeitures, related to stock options is expected to be
recognized over a weighted-average period of approximately 2.07 years.
12
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
For the six months ended September 30, 2006, the weighted average fair value of
stock options granted and the assumptions used to estimate those values using a
Black-Scholes option pricing model were as follows:
Six Months Ended
September 30, 2006
------------------
Expected volatility 68.88%
Risk-free interest rate 4.83%
Expected lives at date of grant (in years) 6.9
Weighted average fair value of the options granted $ 5.04
For the three and six months ended September 30, 2006 stock-based compensation
expense was allocated as follows (in thousands):
Three Months Ended Six Months Ended
September 30, 2006 September 30, 2006
------------------------ ------------------------
Stock-based compensation classified as:
Cost of software license fees $ 1 $ 1
Cost of professional services 368 787
Technology development and support 236 487
Sales and marketing 792 2,170
Administrative and general 668 1,417
--------------- ---------------
Total stock-based compensation expense
before income taxes 2,065 4,862
Income tax benefit (644) (1,567)
--------------- ---------------
Total stock-based compensation expense
after income taxes $ 1,421 $ 3,295
=============== ===============
Prior to the adoption of SFAS 123(R), the Company accounted for stock-based
awards using the intrinsic value method in accordance with APB 25. Under the
intrinsic value method, no stock based compensation expense had been recognized
in the results of operations for stock-based awards because the exercise price
of the stock options granted equaled the fair market value of the underlying
stock at the date of grant. By electing the modified prospective transition
method allowed under SFAS 123(R), the Company's Consolidated Statements of
Operations prior to fiscal 2007 have not been restated to reflect, and do not
include, the impact of SFAS 123(R).
13
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
If compensation cost for the Company's stock-based compensation plans had been
determined based on the fair value at the grant dates for the three and six
months ended September 30, 2005 consistent with the method prescribed by SFAS
No. 123(R), the Company's net income and earnings per share would have been
adjusted to the pro forma amounts indicated below (in thousands, except earnings
per share data):
Three Months Ended Six Months Ended
September 30, 2005 September 30, 2005
------------------ ------------------
Net income:
As reported $ 24,190 $ 48,813
Compensation cost, net of tax (2,564) (5,056)
-------- --------
Pro forma $ 21,626 $ 43,757
======== ========
Earnings per share:
As reported:
Basic earnings per share $ 0.06 $ 0.13
Diluted earnings per share 0.06 0.13
Pro forma:
Basic earnings per share 0.06 0.11
Diluted earnings per share 0.06 0.11
For the six months ended September 30, 2005, the weighted average fair value of
stock options granted and the assumptions used to estimate those values using a
Black-Scholes option pricing model were as follows:
Six Months Ended
September 30, 2005
------------------
Expected volatility 74.23%
Risk-free interest rate 3.62%
Expected lives at date of grant (in years) 5.0
Weighted average fair value of the options granted $ 4.31
Dividend yields were not a factor as the Company has never issued cash dividends
and does not anticipate issuing cash dividends in the future.
14
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
NOTE 6 -- GOODWILL AND INTANGIBLE ASSETS
The components of the Company's intangible assets were as follows (in
thousands):
September 30, 2006
-----------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
------------- ------------- -------------
Unamortized intangible assets:
Trademarks (1) $ 5,853 $ 5,853
============= ============= =============
Amortized intangible assets:
Capitalized software (2) $ 310,491 $ (245,041) $ 65,450
Customer relationship agreements (3) 10,771 (4,196) 6,575
Non-compete agreements (3) 2,281 (1,665) 616
Other (4) 6,758 (5,548) 1,210
------------- ------------- -------------
Total amortized intangible assets $ 330,301 $ (256,450) $ 73,851
============= ============= =============
March 31, 2006
-----------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
------------- ------------- -------------
Unamortized intangible assets:
Trademarks (1) $ 5,853 $ 5,853
============= ============= =============
Amortized intangible assets:
Capitalized software (2) $ 295,996 $ (234,078) $ 61,918
Customer relationship agreements (3) 9,235 (2,935) 6,300
Non-compete agreements (3) 2,057 (1,164) 893
Other (4) 6,381 (5,091) 1,290
------------- ------------- -------------
Total amortized intangible assets $ 313,669 $ (243,268) $ 70,401
============= ============= =============
(1) Certain trademarks were acquired as part of the Covisint, LLC
("Covisint") and Changepoint Corporation ("Changepoint") acquisitions
in fiscal 2004 and 2005. These trademarks are deemed to have an
indefinite life and therefore are not amortized.
(2) Amortization of capitalized software is primarily included in "cost of
software license fees" in the consolidated statements of operations.
Capitalized software is generally amortized over five years.
(3) Customer relationship agreements and non-compete agreements were
acquired as part of recent acquisitions. The customer relationship
agreements are being amortized over periods up to five years. The
non-compete agreements are being amortized over periods up to three
years.
(4) Other amortized intangible assets include trademarks associated with
product acquisitions and are being amortized over periods up to ten
years.
15
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
Changes in the carrying amounts of goodwill are summarized as follows (in
thousands):
Goodwill Products Services Total
-------- ------------- -------------- -------------
Balance at March 31, 2006, net $ 178,910 $ 141,172 $ 320,082
Acquisition 14,175 14,175
Adjustments to previously recorded purchase price 2 2
Effect of foreign currency translation (57) 392 335
------------- -------------- -------------
Balance at June 30, 2006, net $ 193,030 $ 141,564 $ 334,594
Adjustments to previously recorded purchase price 3 3
Effect of foreign currency translation 2 40 42
------------- -------------- -------------
Balance at September 30, 2006, net $ 193,035 $ 141,604 $ 334,639
============= ============== =============
NOTE 7 -- PROPERTY AND EQUIPMENT
During fiscal 2005, the Company implemented a plan to market and sell the former
headquarters building located in Farmington Hills, Michigan. The building was
classified in current assets as held for sale with a carrying value of $13.0
million at March 31, 2006. This building was sold during the second quarter of
fiscal 2007 for $13.4 million. A portion of the proceeds ($12.2 million) was
with an escrow agent and is included in other current assets as of September 30,
2006. The balance with the escrow agent is excluded from the cash flow statement
as of September 30, 2006 and was collected in October 2006.
During fiscal 2006, the Company implemented a plan to market and sell the former
distribution center located in West Bloomfield, Michigan. The building was
classified in current assets as held for sale with a carrying value of $1.8
million at March 31, 2006. This building was sold during the first quarter of
fiscal 2007 for approximately $2.0 million.
16
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
NOTE 8 - SEGMENTS
The Company operates in two business segments in the technology industry:
products and professional services. The Company provides software products and
professional services to IT organizations that help IT professionals efficiently
develop, implement and support the applications that run their businesses.
Financial information for the Company's business segments is as follows (in
thousands):
Three Months Ended Six Months Ended
September 30, September 30,
------------------------ ------------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Revenues:
Products:
Mainframe $ 113,941 $ 122,232 $ 233,686 $ 245,607
Distributed systems 57,900 52,258 115,937 104,279
--------- --------- --------- ---------
Total product revenue 171,841 174,490 349,623 349,886
Professional services 116,666 118,156 235,202 240,088
--------- --------- --------- ---------
Total revenues $ 288,507 $ 292,646 $ 584,825 $ 589,974
========= ========= ========= =========
Operating expenses:
Products $ 114,260 $ 108,150 $ 223,853 $ 221,527
Professional services 103,645 104,944 211,260 211,189
Corporate expenses 45,156 51,299 91,384 99,528
--------- --------- --------- ---------
Total operating expenses $ 263,061 $ 264,393 $ 526,497 $ 532,244
========= ========= ========= =========
Income (loss) from operations before other income:
Products $ 57,581 $ 66,340 $ 125,770 $ 128,359
Professional services 13,021 13,212 23,942 28,899
Corporate expenses (45,156) (51,299) (91,384) (99,528)
--------- --------- --------- ---------
Income from operations
before other income 25,446 28,253 58,328 57,730
Other income, net 10,613 7,852 21,494 14,585
--------- --------- --------- ---------
Income before income taxes $ 36,059 $ 36,105 $ 79,822 $ 72,315
========= ========= ========= =========
Financial information regarding geographic operations is presented in the table
below (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
----------------------- -----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Revenues:
United States $ 192,641 $ 196,826 $ 395,281 $ 396,305
Europe and Africa 69,507 72,693 136,972 148,177
Other international operations 26,359 23,127 52,572 45,492
--------- --------- --------- ---------
Total revenues $ 288,507 $ 292,646 $ 584,825 $ 589,974
========= ========= ========= =========
17
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
NOTE 9 - RESTRUCTURING ACCRUAL
In the fourth quarter of fiscal 2002, the Company adopted a restructuring plan
to reorganize its operating divisions, primarily the professional services
segment. These changes were designed to increase profitability by better
aligning cost structures with current market conditions.
The restructuring plan included a reduction of professional services staff at
certain locations, the closing of entire professional services offices and a
reduction of sales support personnel, lab technicians and related administrative
and financial staff. Approximately 1,600 employees worldwide were terminated as
a result of the reorganization.
The following table summarizes the restructuring accrual as of March 31, 2006,
and charges against the accrual during the first six months of fiscal 2007 (in
thousands):
Charges and Charges and
adjustments against adjustments against
Balance at the accrual during the accrual during Balance at
March 31, the quarter ended the quarter ended September 30,
2006 June 30, 2006 September 30, 2006 2006
------------- --------------------- ----------------------- ---------------
Facilities costs (primarily
lease abandonments) $ 5,950 $ 378 $ 1,943 $ 3,629
During the second quarter of 2007, the Company recorded a reduction of $1.5
million in the restructuring accrual related to subleases of abandoned lease
space in excess of what was originally anticipated. These adjustments were
included in administrative and general expense.
NOTE 10 - DEBT
The Company has no long term debt.
The Company holds a $100 million revolving credit facility. On July 27, 2006,
the Company amended the credit agreement extending the maturity to July 26,
2007. The amended credit agreement eliminated the liquidity and net worth
covenants and no longer restricts merger and acquisition activity when the
Company is the continuing or surviving entity. Interest is payable at 1% over
the Eurodollar rate or at the prime rate (8.25% at September 30, 2006), at the
Company's option. No borrowings have occurred or are planned under this
facility.
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Compuware Corporation
Detroit, Michigan
We have reviewed the accompanying condensed consolidated balance sheet of
Compuware Corporation and subsidiaries (the "Company"), as of September 30,
2006, and the related condensed consolidated statements of operations for the
three and six-month periods ended September 30, 2006 and 2005 and cash flows for
the six-month periods ended September 30, 2006 and 2005. These interim financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the condensed consolidated financial statements,
effective April 1, 2006, the Company changed its method of accounting for stock
based compensation to conform to Statement of Financial Accounting Standards No.
123R, Share-Based Payment.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of Compuware Corporation and subsidiaries as of March 31, 2006, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
May 15, 2006, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of March 31, 2006 is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
DELOITTE & TOUCHE LLP
Detroit, Michigan
November 3, 2006
19
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This discussion contains certain forward-looking statements within the meaning
of the federal securities laws which are identified by the use of the words
"believes," "expects," "anticipates," "will," "contemplates," "would" and
similar expressions that contemplate future events. Numerous important factors,
risks and uncertainties affect our operating results and could cause actual
results to differ materially from the results implied by these or any other
forward-looking statements made by us, or on our behalf. A summary of the
material risks and uncertainties that we believe affect us are highlighted below
and have not materially changed since the end of fiscal 2006 (see Item 1A Risk
Factors in our 2006 10-K for a more detailed explanation of each risk). These
risks and uncertainties are not the only ones we face. Additional risks and
uncertainties that we are not aware of or focused on or currently deem
immaterial may also impair business operations. This report is qualified in its
entirety by these risk factors. If any of the following risks actually occur,
our financial condition and results of operations could be materially and
adversely affected. If this were to happen, the value of our common stock could
decline significantly, and shareholders could lose all or part of their
investment.
There can be no assurance that future results will meet expectations. While we
believe that our forward-looking statements are reasonable, you should not place
undue reliance on any such forward-looking statements, which speak only as of
the date made. Except as required by applicable law, we do not undertake any
obligation to publicly release any revisions which may be made to any
forward-looking statements to reflect events or circumstances occurring after
the date of this report.
- The majority of our software products revenue is dependent on
our customers' continued use of International Business
Machines Corp. ("IBM") and IBM-compatible products, and on the
acceptance of our pricing structure for software licenses and
maintenance.
- Our software and technology may infringe the proprietary
rights of others.
- We must develop or acquire product enhancements and new
products to succeed.
- Acquisitions may be difficult to integrate, disrupt our
business or divert the attention of our management and may
result in financial results that are different than expected.
- Maintenance revenue could decline.
- Our quarterly financial results vary and may be adversely
affected by a number of unpredictable factors.
- Our results could be adversely affected by increased
competition, pricing pressures and technological changes.
- Unanticipated changes in our operating results or effective
tax rates, or exposure to additional income tax liabilities,
could affect our profitability.
- Our results could be adversely affected if our operating
margins decline.
- A further decline in the U.S. domestic automotive
manufacturing business could adversely affect our professional
services business.
- The market for professional services is highly competitive,
fragmented and characterized by low barriers to entry.
- We are exposed to exchange rate risks on foreign currencies
and to other international risks which may adversely affect
our business and results of operations.
20
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- Current laws may not adequately protect our proprietary
rights.
- The loss of certain key employees and technical personnel or
our inability to hire additional qualified personnel could
have a material adverse effect on our business.
- Acts of terrorism, acts of war and other unforeseen events may
cause damage or disruption to us or our customers which could
adversely affect our business, financial condition and
operating results.
- Our articles of incorporation, bylaws and rights agreement as
well as certain provisions of Michigan law have anti-takeover
effects that may deter hostile takeovers or delay or prevent
changes in control or management, including transactions in
which the stockholders of Compuware might otherwise receive a
premium for their shares over the current market prices.
OVERVIEW
In this section, we discuss our results of operations on a segment basis for
each of our financial reporting segments. We operate in two business segments in
the technology industry: products and professional services. We evaluate segment
performance based primarily on segment contribution before corporate expenses.
References to years are to fiscal years ended March 31. This discussion and
analysis should be read in conjunction with the unaudited consolidated financial
statements and notes included elsewhere in this report and our annual report on
Form 10-K for the fiscal year ended March 31, 2006, particularly "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations".
We deliver value to businesses worldwide by providing software products and
professional services that increase the efficiency and effectiveness of the
entire IT organization. Originally founded in 1973 as a professional services
company, in the late 1970's we began to offer mainframe productivity tools for
fault management and diagnosis, file and database management, and application
debugging.
In the 1990's, the IT industry moved toward distributed and web-based platforms.
Our solutions portfolio grew in response, and we now market a comprehensive
portfolio of IT solutions across the full range of enterprise computing
platforms that help:
- Develop and deliver high quality, high performance enterprise
business applications in a timely and cost-effective manner.
- Measure and manage application service using business-relevant
metrics, and maintain consistent, high levels of service
delivery.
- Provide executive visibility, decision support and process
automation across the entire IT organization to enable all
available resources to be harnessed in alignment with business
priorities.
Additionally, to be competitive in today's global economy, enterprises must
securely share applications, information and business processes. We address this
market need through our Covisint offerings, which help manage the supply chain
through the integration of vital business information and processes between
partners, customers and suppliers.
We focus on growing revenue and profit margins by enhancing and promoting our
current product lines, expanding our product and service offerings through key
acquisitions, developing strategic partnerships in order to provide clients with
our product solutions and managing our costs.
21
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following occurred during the second quarter of 2007:
- Announced authorization by the Board of Directors to
repurchase an additional $300 million of common stock.
- Repurchased approximately 21.7 million shares of our common
stock at an average price of $7.23 per share.
- Achieved a 10.8% increase in distributed product revenue
compared to the second quarter of 2006. The increase was a
reflection of our continued focus on promoting our distributed
products and an expanding maintenance base for those products.
- Incurred a 6.8% decrease in mainframe product revenue compared
to the second quarter of 2006 primarily related to a decline
in license revenue.
- Experienced a decrease in products contribution margin to
33.5% in the second quarter of 2007 from 38.0% in the second
quarter of 2006 primarily due to a decrease in mainframe
license revenue and an increase in technology development and
support costs.
- Released 4 mainframe and 11 distributed product updates
designed to increase the productivity of the IT departments of
our customers.
- Maintained the professional services contribution margin at
11.2% in the second quarter of 2007 consistent with the second
quarter of 2006.
Our ability to achieve our strategies and objectives is subject to a number of
factors some of which we may not be able to control. See "Forward-Looking
Statements".
22
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the consolidated statements of operations as a percentage of total
revenues and the percentage change in such items compared to the prior period:
Percentage of Percentage of
Total Revenues Total Revenues
------------------------- -------------------------
Three Months Ended Six Months Ended
September 30, Period- September 30, Period-
------------------------- to-Period ------------------------- to-Period
2006 2005 Change 2006 2005 Change
---------- -------- --------- ---------- -------- --------
REVENUE:
Software license fees 19.7% 21.7% (10.8)% 21.2% 22.3% (5.7)%
Maintenance fees 39.9 37.9 3.8 38.6 37.0 3.3
Professional services fees 40.4 40.4 (1.3) 40.2 40.7 (2.0)
---------- -------- ---------- --------
Total revenues 100.0 100.0 (1.4) 100.0 100.0 (0.9)
---------- -------- ---------- --------
OPERATING EXPENSES:
Cost of software license fees 2.4 1.9 26.3 2.3 1.9 21.0
Cost of professional services 35.9 35.9 (1.2) 36.1 35.8 0.0
Technology development and support 13.7 11.8 14.9 13.1 11.9 9.6
Sales and marketing 23.5 23.3 (0.7) 22.8 23.7 (4.8)
Administrative and general 15.7 17.5 (12.0) 15.7 16.9 (8.2)
---------- -------- ---------- --------
Total operating expenses 91.2 90.4 (0.5) 90.0 90.2 (1.1)
---------- -------- ---------- --------
Income from operations 8.8 9.6 (9.9) 10.0 9.8 1.0
Other income 3.7 2.7 35.2 3.7 2.5 47.4
---------- -------- ---------- --------
Income before income taxes 12.5 12.3 (0.1) 13.7 12.3 10.4
Income tax provision 3.9 4.0 (5.6) 4.4 4.0 9.3
---------- -------- ---------- --------
Net income 8.6% 8.3% 2.6% 9.3% 8.3% 10.9%
========== ======== ========== ========
SOFTWARE PRODUCTS
REVENUE
Our products are designed to enhance the effectiveness of key disciplines
throughout the IT organization from application development and delivery to
service management and IT portfolio management supporting all major enterprise
computing platforms. Product revenue, which consists of software license fees
and maintenance fees, comprised 59.6% of total revenue during the second quarter
of each of 2007 and 2006, and 59.8% and 59.3% of total revenue during the first
six months of 2007 and 2006, respectively.
Distributed software product revenue increased $5.6 million or 10.8% during the
second quarter of 2007 to $57.9 million from $52.3 million during the second
quarter of 2006 and increased $11.6 million or 11.2% during the first six months
of 2007 to $115.9 million from $104.3 million during the first six months of
2006. The increases were primarily due to license revenue growth related to our
Vantage product line resulting from increased customer demand for
performance-related software and the enhancement of Vantage to include agentless
monitoring through software acquired in the fiscal 2006 acquisition of Adlex,
Incorporated.
23
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Mainframe software product revenue decreased $8.3 million or 6.8% during the
second quarter of 2007 to $113.9 million from $122.2 million during the second
quarter of 2006 and decreased $11.9 million or 4.9% during the first six months
of 2007 to $233.7 million from $245.6 million during the first six months of
2006. The declines were primarily a result of lower license revenue due to
decreased demand for software on additional computing capacity in our European
operations.
License revenue decreased $6.9 million or 10.8% during the second quarter of
2007 to $56.7 million from $63.6 million during the second quarter of 2006 and
decreased $7.4 million or 5.7% during the first six months of 2007 to $124.2
million from $131.6 million during the first six months of 2006. The declines
were due to the reduction of $9.6 million and $14.1 million, respectively, in
mainframe license revenue, offset by increases in distributed license revenue.
Maintenance fees increased $4.2 million or 3.8% to $115.1 million during the
second quarter of 2007 from $110.9 million during the second quarter of 2006 and
increased $7.1 million or 3.3% during the first six months of 2007 to $225.4
million from $218.3 million during the first six months of 2006. The increases
were primarily due to an increase in distributed maintenance revenue related to
our Vantage and QACenter product lines.
Product revenue by geographic location is presented in the table below (in
thousands):
Three Months Ended Six Months Ended
September 30, September 30,
------------------------------------- ------------------------------------
2006 2005 2006 2005
----------------- ---------------- ---------------- ----------------
United States $ 94,315 $ 95,420 $ 194,748 $ 190,284
Europe and Africa 53,270 57,644 105,935 116,924
Other international operations 24,256 21,426 48,940 42,678
----------------- ---------------- ---------------- ----------------
Total product revenue $ 171,841 $ 174,490 $ 349,623 $ 349,886
================= ================ ================ ================
PRODUCT CONTRIBUTION AND EXPENSES
Financial information for the products segment is as follows (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
------------------------------------ ------------------------------------
2006 2005 2006 2005
---------------- ---------------- ---------------- ----------------
Revenue $ 171,841 $ 174,490 $ 349,623 $ 349,886
Expenses 114,260 108,150 223,853 221,527
---------------- ---------------- ---------------- ----------------
Product contribution $ 57,581 $ 66,340 $ 125,770 $ 128,359
================ ================ ================ ================
The product segment generated contribution margins of 33.5% and 38.0% during the
second quarter of 2007 and 2006, respectively, and 36.0% and 36.7% during the
first six months of 2007 and 2006, respectively. Product expenses include cost
of software license fees, technology development and support costs and sales and
marketing expenses. These expenses are discussed below.
24
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cost of software license fees includes amortization of capitalized software, the
cost of duplicating and disseminating products to customers including associated
hardware costs and the cost of author royalties. For the second quarter of 2007,
cost of software license fees increased $1.4 million or 26.3% to $7.0 million
from $5.6 million in the second quarter of 2006 and for the first six months of
2007 increased $2.4 million or 21.0% to $13.6 million from $11.2 million in the
first six months of 2006. The increases in cost of software license fees were
primarily due to an increase in amortization of capitalized software and an
increase in hardware costs resulting from increased demand in our Vantage
product line. As a percentage of software license fees, cost of software license
fees were 12.4% and 8.7% in the second quarter of 2007 and 2006, respectively,
and 10.9% and 8.5% in the first six months of 2007 and 2006, respectively.
Technology development and support includes, primarily, the costs of programming
personnel associated with product development and support less the amount of
software development costs capitalized during the period. Also included here are
personnel costs associated with developing and maintaining internal systems and
hardware/software costs required to support technology initiatives. As a
percentage of product revenue, costs of technology development and support were
23.0% and 19.7% in the second quarter of 2007 and 2006, respectively, and 22.0%
and 20.0% during the first six months of 2007 and 2006, respectively.
Capitalization of internally developed software products begins when
technological feasibility of the product is established. Total technology
development and support costs incurred internally and capitalized in the second
quarter and first six months of 2007 and 2006 were as follows (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
------------------------- -------------------------
2006 2005 2006 2005
---------- ----------- ----------- ----------
Technology development and support costs incurred $ 43,534 $ 39,658 $ 86,256 $ 80,157
Capitalized technology development and support costs (3,995) (5,258) (9,477) (10,104)
---------- ----------- ----------- ----------
Technology development and support costs reported $ 39,539 $ 34,400 $ 76,779 $ 70,053
========== =========== =========== ==========
Before the capitalization of internally developed software products, total
technology development and support expenditures for the second quarter of 2007
increased $3.8 million or 9.8% to $43.5 million from $39.7 million in the second
quarter of 2006 and for the first six months of 2007 increased $6.1 million or
7.6% to $86.3 million from $80.2 million in the first six months of 2006. The
increases in expense were primarily due to higher compensation and benefit costs
resulting from increased employee headcount, primarily programming personnel, in
order to meet new product initiatives.
Sales and marketing costs consist primarily of personnel related costs
associated with product sales and sales support and marketing for all our
offerings. For the second quarter of 2007, sales and marketing costs decreased
$500,000 or 0.7% to $67.7 million from $68.2 million in the second quarter of
2006 and for the first six months of 2007 decreased $6.7 million or 4.8% to
$133.5 million from $140.2 million in the first six months of 2006. The change
in sales and marketing costs for the first six months of 2007 was primarily
attributable to lower compensation, benefit and commission costs of
approximately $9.2 million resulting from severance expense being incurred
during the first quarter of 2006 in our European operations that was not
incurred during 2007 and lower commission costs in 2007 due to the decline in
25
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
mainframe license revenue offset by a $2.2 million increase in stock option
expense related to the adoption of SFAS 123(R) effective April 1, 2006.
As a percentage of product revenue, sales and marketing costs were 39.4% and
39.1% in the second quarter of 2007 and 2006, respectively, and 38.2% and 40.1%
in the first six months of 2007 and 2006, respectively.
PROFESSIONAL SERVICES
REVENUE
We offer a broad range of IT services to help businesses make the most of their
IT assets. Some of these services include outsourcing and co-sourcing,
application management, product solutions, project management, enterprise
resource planning and customer relationship management services. Revenue from
professional services decreased $1.5 million or 1.3% during the second quarter
of 2007 to $116.7 million compared to $118.2 million in the second quarter of
2006, and decreased $4.9 million or 2.0% during the first six months of 2007 to
$235.2 million from $240.1 million during the first six months of 2006. The
decreases in revenue were primarily due to cost cutting initiatives adopted by
certain domestic customers within the automotive sector reducing the spending on
certain IT programs and, to a lesser extent, to delays in obtaining certain
state government contracts.
Professional services revenue by geographic location is presented in the table
below (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------------- --------------------------------
2006 2005 2006 2005
--------------- -------------- -------------- --------------
United States $ 98,326 $ 101,406 $ 200,533 $ 206,021
Europe and Africa 16,237 15,049 31,037 31,253
Other international operations 2,103 1,701 3,632 2,814
--------------- -------------- -------------- --------------
Total professional services revenue $ 116,666 $ 118,156 $ 235,202 $ 240,088
=============== ============== ============== ==============
26
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROFESSIONAL SERVICES CONTRIBUTION AND EXPENSES
Financial information for the professional services segment is as follows (in
thousands):
Three Months Ended Six Months Ended
September 30, September 30,
----------------------------------- ---------------------------------
2006 2005 2006 2005
---------------- --------------- --------------- --------------
Revenue $ 116,666 $ 118,156 $ 235,202 $ 240,088
Expenses 103,645 104,944 211,260 211,189
---------------- --------------- --------------- --------------
Professional services contribution $ 13,021 $ 13,212 $ 23,942 $ 28,899
================ =============== =============== ==============
The professional services segment generated a contribution margin of 11.2%
during the second quarter of each of 2007 and 2006, and 10.2% and 12.0% during
the first six months of 2007 and 2006, respectively.
Cost of professional services consists primarily of personnel-related costs of
providing services, including billable staff, subcontractors and sales
personnel. Cost of professional services decreased $1.3 million or 1.2% during
the second quarter of 2007 to $103.6 million compared to $104.9 million in the
second quarter of 2006 and remained consistent during the first six months of
2007 compared to the first six months of 2006. The change in cost of
professional services for the second quarter of 2007 was due to a decrease in
compensation costs resulting from reductions in hourly employee headcount.
CORPORATE AND OTHER EXPENSES
Administrative and general expenses primarily consist of costs associated with
the corporate executive, finance, human resources, administrative, legal,
communications and investor relations departments. In addition, administrative
and general expenses include all facility-related costs, such as rent, building
depreciation, maintenance, utilities, etc., associated with worldwide sales,
professional services and software development offices. Administrative and
general expenses decreased $6.1 million or 12.0% during the second quarter of
2007 to $45.2 million from $51.3 million during the second quarter of 2006, and
decreased $8.1 million or 8.2% during the first six months of 2007 to $91.4
million from $99.5 million in the first six months of 2006. The decreases in
cost were primarily attributable to an impairment charge of $4.0 million related
to our former headquarters building in Farmington Hills, Michigan and litigation
settlement charges of $4.2 million that were recorded during the second quarter
of 2006. The decrease during the first six months of 2007 was further impacted
by an impairment charge of $3.9 million in the first quarter of 2006 related to
a purchased software application that management no longer intended to use and a
$1.6 million decline in legal expenses as IBM litigation costs were still being
incurred during the first six months of 2006. The decreases in costs were
partially offset by approximately $2.0 million in foreign currency losses
related to inter-company balances with our wholly owned subsidiaries, $1.4
million increase in charitable contribution expense and a $1.4 million increase
in stock option expense related to the adoption of SFAS 123(R) effective April
1, 2006.
Other income, net ("other income") consists primarily of interest income
realized from investments, interest earnings on deferred customer receivables
and income/losses generated from our investments in partially owned companies.
Other income increased $2.7 million or
27
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
35.2% during the second quarter of 2007 to $10.6 million compared to $7.9
million in the second quarter of 2006 and increased $6.9 million or 47.4% during
the first six months of 2007 to $21.5 million from $14.6 million during the
first six months of 2006. The increases were primarily attributable to an
increase in investment interest income due to higher interest rates earned on
investments during the respective periods of 2007 compared to 2006.
Income taxes are accounted for using the asset and liability approach. Deferred
income taxes are provided for the differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. The income
tax provision was $11.3 million in the second quarter of 2007 and $25.7 million
for the first six months of 2007, which represents an effective tax rate of
31.2% and 32.2%, respectively. This compares to an income tax provision of $11.9
million in the second quarter of 2006 and $23.5 million for the first six months
of 2006, which represents an effective tax rate of 33% and 32.5%, respectively.
RESTRUCTURING ACCRUAL
In the fourth quarter of 2002, we adopted a restructuring plan to reorganize our
operating divisions, primarily the professional services segment. These changes
were designed to increase profitability by better aligning cost structures with
current market conditions. See Note 9 to the Condensed Consolidated Financial
Statements for changes in the restructuring accrual for the first six months of
2007.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Assumptions and estimates
were based on the facts and circumstances known at September 30, 2006. However,
future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment. The accounting policies discussed in Item 7 of our
Annual Report on Form 10-K for the year ended March 31, 2006 are considered by
management to be the most important to an understanding of the financial
statements, because their application places the most significant demands on
management's judgment and estimates about the effect of matters that are
inherently uncertain. These policies are also discussed in Note 1 of the Notes
to Consolidated Financial Statements included in Item 8 of that report. There
have been no material changes to that information since the end of fiscal 2006.
28
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2006, cash and cash equivalents and investments totaled
approximately $761.6 million. During the first six months of 2007 and 2006, cash
flow from operations was $72.4 million and $88.3 million, respectively. The
decrease was due to a decline in cash received from customers offset by an
increase in interest income received. During the first six months of 2007 and
2006, capital expenditures including property and equipment and capitalized
research and software development totaled $20.0 million and $17.1 million,
respectively.
We hold a $100 million revolving credit facility that now matures on July 26,
2007. See Note 10 to the Condensed Consolidated Financial Statements for a
description of the terms of the facility, including recent amendments to the
terms of the facility. No borrowings have occurred under this facility since
inception.
During fiscal 2005, we implemented a plan to market and sell the former
headquarters building located in Farmington Hills, Michigan. This building was
sold during the second quarter of fiscal 2007 for $13.4 million of which $1.2
million was received during the quarter and the remaining $12.2 million was
received in October 2006.
During fiscal 2006, we implemented a plan to market and sell the former
distribution center located in West Bloomfield, Michigan. This building was sold
during the first quarter of 2007 for approximately $2.0 million.
On April 13, 2006, we announced that the Board of Directors authorized the
repurchase of up to $125 million of our common stock and on August 22, 2006, we
announced that the Board of Directors authorized the repurchase of up to an
additional $300 million of our common stock. Our purchases of stock may occur on
the open market, through negotiated or block transactions based upon market and
business conditions. During the first six months of 2007, we repurchased
approximately 26.3 million shares of our common stock under this program at an
average price of $7.23 per share and a total cost of $190.1 million.
Approximately $234.9 million remains for future purchases.
In April 2006, we acquired SteelTrace Limited, a privately held provider of
requirements management products that align application delivery to business
needs through a structured, visual approach to the management of enterprise
application requirements, for approximately $20.7 million in cash. The
acquisition has been accounted for using the purchase method in accordance with
SFAS No. 141, "Business Combinations" and, accordingly, the assets and
liabilities acquired have been recorded at preliminary fair value as of the
acquisition date.
We continue to evaluate business acquisition opportunities that fit our
strategic plans.
We believe available cash resources, together with cash flow from operations,
will be sufficient to meet cash needs for the foreseeable future.
29
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Recently Issued Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109", which clarifies the accounting for
uncertainty in tax positions. This Interpretation requires that we recognize in
our financial statements, the impact of a tax position, if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. This Interpretation is effective for fiscal years beginning after
December 15, 2006, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. Management is
currently considering the impact this Interpretation will have on the financial
statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157 "Fair Value Measurements" ("SFAS 157"), which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS 157 applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value, and therefore, does not expand the use
of fair value in any new circumstances. This Interpretation is effective for
fiscal years beginning after November 15, 2007. Management is currently
considering the impact this Interpretation will have on the financial
statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 ("SAB 108") which provides guidance on the
consideration of the effects of prior year misstatements when quantifying
misstatements in current year financial statements. This Interpretation is
effective for fiscal years ending after November 15, 2006.
CONTRACTUAL OBLIGATIONS
Our contractual obligations are described in "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained in our
Annual Report on Form 10-K for the year ended March 31, 2006. Except as
described elsewhere in this report on Form 10-Q, there have been no material
changes to those obligations or arrangements outside of the ordinary course of
business since the end of fiscal 2006.
30
COMPUWARE CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed primarily to market risks associated with movements in interest
rates and foreign currency exchange rates. There have been no material changes
to our foreign exchange risk management strategy or our investment standards
subsequent to March 31, 2006, therefore the market risks remain substantially
unchanged since we filed the Annual Report on Form 10-K for the fiscal year
ended March 31, 2006.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
material information required to be disclosed in our reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required financial
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that a control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, with a company have been
detected.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the
"Exchange Act"). Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
are effective, at the reasonable assurance level, to cause the material
information required to be disclosed in the reports that we file or submit under
the Exchange Act to be recorded, processed, summarized and reported within the
time periods specified in the Commission's rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No changes in our internal control over financial reporting occurred during the
quarter ended September 30, 2006 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
31
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth, the repurchases of common stock for the quarter
ended September 30, 2006:
Approximate
Total number of dollar value
shares repurchased of shares that
as part of may yet be
Total number of Average price publicly announced purchased
shares paid per repurchase plans under the plan
Period repurchased (a) share (a) or program (a) or program (a)
------------------------------------------ ------------------ --------------- -------------------- ----------------
As of June 30, 2006 4,533,547 $ 92,161,000
July 1, 2006 - July 31, 2006 1,148,937 $ 6.89 5,682,484 84,245,000
August 1, 2006 - August 31, 2006 14,809,488 7.05 20,491,972 279,829,000
September 1, 2006 - September 30, 2006 5,788,600 7.76 26,280,572 234,896,000
---------------
Total 21,747,025 $ 7.23
===============
(a) On April 13, 2006, we announced that the Board of Directors has
authorized the repurchase of $125 million of the Company's common
stock. The entire amount authorized under this plan was repurchased as
of September 30, 2006. On August 22, 2006, we announced that the Board
of Directors authorized the repurchase of up to an additional $300
million of the Company's common stock. Our purchases of stock may occur
on the open market or in negotiated or block transactions based upon
market and business conditions. Unless terminated earlier by resolution
of our Board of Directors, the share repurchase program will expire
when we have repurchased all shares authorized for repurchase
thereunder.
32
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on August 22, 2006 at the Company's
headquarters. The first matter voted upon at the meeting was the election of
directors. Each of the nominees was elected to hold office for one year until
the 2007 Annual Meeting of Shareholders or until their successors are elected
and qualified. The results of the voting at the meeting are as follows:
Nominee for Director Total Votes For Total Votes Withheld
--------------------------- --------------- --------------------
Dennis W. Archer 312,822,108 14,258,887
Gurminder S. Bedi 320,163,842 6,917,153
William O. Grabe 318,030,700 9,050,295
William R. Halling 318,870,879 8,210,116
Peter Karmanos, Jr. 317,702,878 9,378,117
Faye Alexander Nelson 320,103,783 6,977,212
Glenda D. Price 318,445,750 8,635,245
W. James Prowse 291,821,425 35,259,570
G. Scott Romney 312,495,783 14,585,212
The second matter voted upon was the ratification of the appointment of Deloitte
& Touche LLP, our independent registered public accounting firm, to audit our
consolidated financial statements for the fiscal year ending March 31, 2007.
Total votes for -- 317,054,522, against -- 9,637,385 and abstained -- 389,088.
The third matter voted upon was the ratification of the Rights Agreement, dated
as of October 25, 2000, as amended, between Compuware Corporation and Equiserve
Trust Company, N.A. (now known as Computershare Trust Company, N.A.) Total votes
for - 246,700,751, against - 31,423,720, abstained - 866,628 and broker non-vote
- 48,089,896.
The total number of the Company's common shares issued and outstanding and
entitled to be voted at the Annual Meeting was 373,662,618 shares. The total
number of shares voted at the Annual Meeting was 327,080,995 or 87.5% of the
shares outstanding and eligible to vote.
33
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit
Number Description of Document
------ -----------------------
4.8 Amended and Restated Credit Agreement Dated May 2, 2003 as of July 27, 2006 (1)
15 Independent Registered Public Accounting Firm's Awareness Letter (2)
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act. (2)
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act. (2)
32 Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities
Exchange Act. (2)
(1) Incorporated by reference to the registrant's June 30, 2006 Form 10-Q.
(2) Filed herewith.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUWARE CORPORATION
Date: November 3, 2006 By: /s/ Peter Karmanos, Jr.
-------------------- -----------------------
Peter Karmanos, Jr.
Chief Executive Officer
(duly authorized officer)
Date: November 3, 2006 By: /s/ Laura L. Fournier
---------------------- ----------------------
Laura L. Fournier
Senior Vice President
Chief Financial Officer
Treasurer
35
Exhibit Index
-------------
Exhibit
Number Description of Document
------ -----------------------
15 Independent Registered Public Accounting Firm's Awareness Letter
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act.
32 Certification pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) of the Securities
Exchange Act.